Elderly people living in nursing homes would avoid "punitive" Fair Deal scheme costs if they sold their family homes under new Government proposals aimed at resolving the housing crisis.

The shake-up of the Fair Deal scheme would encourage older people to put their homes on the housing market by helping them to avoid handing over the entire proceeds of the sale to cover their nursing home costs.

Long-term nursing home residents are currently reluctant to sell their family homes because the cash raised would be subjected to Fair Deal contributions for the rest of their lives. Family homes that remain in their name are counted as assets under the scheme but the value of the house is only subjected to contributions for three years.

Once a family home is converted into cash, it is subjected, along with all other assets, to 7.5pc Fair Deal contributions while the nursing home resident is still alive.

Children are unwilling to allow parents to sell their homes as they fear the State will take all of the proceeds to pay for nursing home costs.

Under the new incentive scheme being proposed by Minister for Older People Jim Daly, money raised by the sale of homes could be ring-fenced after paying contributions to Fair Deal for five years.

A senior Government source said there is a need for a "halfway house" between the "punishing" cost of selling a house while in a nursing home and the necessity to raise State funding for the Fair Deal scheme.

The source said the incentive to sell would be aimed at people who are "willing, ready and able" to sell their family home and emphasised that the Government would not force older people to put their houses on the market.

"We would not support any proposal that would make it compulsory to sell a home but it is about making it possible to sell for some who would like to sell and make sure the financial cost is not as punitive as it is now," a Government source said.

The proposal is one of a number of new measures being put forward by ministers seeking to alleviate the worst housing crisis in the history of the State.

All proposals will be considered carefully by Finance Minister Paschal Donohoe during budget negotiations.

However, plans to resolve the housing crisis are at the forefront of the Government's plans ahead of October's Budget.

Last week, Housing Minister Eoghan Murphy outlined an incentive scheme which would encourage older people to rent their family homes while they are in nursing homes.

At present, nursing home residents would have to hand over 80pc of disposal income raised from renting their houses to pay for nursing home cost.

Mr Murphy wants to exempt a proportion of rental income from the Fair Deal scheme to bring more houses into the market as part of his vacant homes strategy, to be published soon. The minister insisted he was not trying to force older people to become landlords but rather he was offering them incentives to rent their vacant homes.

It is unclear how many older people in care have homes which could be rented or sold but there are currently 25,000 in nursing homes and it is believed a significant proportion own vacant properties.

Trinity assistant professor in economics Ronan Lyons recently said the Fair Deal scheme is contributing to the housing crisis because there is no incentive for people in nursing homes to rent or sell their houses.

Mr Murphy is preparing to announce a number of new measures aimed at bringing more vacant homes back into the housing market.

He plans to introduce a vacant property tax to encourage people to bring homes back into use and give local authorities enhanced compulsory order powers to increase the State's housing stock.